Accounting mar27068_fm_i-xxii, 1.indd i 11/12/09 9:59:05 AM This page intentionally left blank Ninth Edition Accounting What the Numbers Mean David H Marshall, MBA, CPA, CMA Professor of Accounting Emeritus Millikin University Wayne W McManus, LLM, JD, MS, MBA, CFA, CPA, CMA, CIA Professor of Accounting and Law International College of the Cayman Islands Daniel F Viele, MS, CPA, CMA Professor of Accounting Associate Vice President for Academic Affairs Webster University mar27068_fm_i-xxii, 1.indd iii 11/13/09 6:28:21 PM ACCOUNTING: WHAT THE NUMBERS MEAN Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020 Copyright © 2011, 2008, 2007, 2004, 2002, 1999, 1996, 1993, 1990 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper WCK/WCK ISBN 978-0-07-352706-2 MHID 0-07-352706-8 Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Publisher: Tim Vertovec Executive sponsoring editor: Steve Schuetz Director of development: Ann Torbert Development editor: Katie Jones Vice president and director of marketing: Robin J Zwettler Executive marketing manager: Sankha Basu Vice president of editing, design and production: Sesha Bolisetty Lead project manager: Christine A Vaughan Lead production supervisor: Michael R McCormick Cover and interior designer: JoAnne Schopler Senior media project manager: Greg Bates Typeface: 10.5/12 Times Roman Compositor: MPS Limited, A Macmillan Company Printer: Quebecor World Versailles Inc Library of Congress Cataloging-in-Publication Data Marshall, David H Accounting : what the numbers mean/ David H Marshall, Wayne W McManus, Daniel F Viele.—9th ed p cm Includes index ISBN-13: 978-0-07-352706-2 (alk paper) ISBN-10: 0-07-352706-8 (alk paper) Accounting Managerial accounting I McManus, Wayne W II Viele, Daniel F III Title HF5636.M37 2011 657—dc22 2009040466 www.mhhe.com mar27068_fm_i-xxii, 1.indd iv 11/13/09 6:28:29 PM Meet the Authors Preface V David H Marshall is Professor of Accounting Emeritus at Millikin University He taught at Millikin, a small, independent university located in Decatur, Illinois, for 25 years He taught courses in accounting, finance, computer information systems, and business policy, and was recognized as an outstanding teacher The draft manuscript of this book was written in 1986 and used in a one-semester course that was developed for the non-business major Subsequently supplemented with cases, it was used in the business core accounting principles and managerial accounting courses Concurrently, a one-credit hour accounting laboratory taught potential accounting majors the mechanics of the accounting process Prior to his teaching career, Marshall worked in public accounting and industry and he earned an MBA from Northwestern University Professor Marshall’s interests outside academia include community service, woodturning, sailing, and travel Wayne W McManus makes his home in Grand Cayman, Cayman Islands, BWI, where he worked in the private banking sector for several years and is now a semiretired consultant He maintains an ongoing relationship with the International College of the Cayman Islands as an adjunct Professor of Accounting and Law and as a member of the College’s Board of Trustees McManus now offers the Cayman CPA Review course through the Financial Education Institute Ltd and several professional development courses through the Chamber of Commerce He earned an M.S in accounting from Illinois State University, an MBA from the University of Kansas, a law degree from Northern Illinois University, and a master’s of law in taxation from the University of Missouri-Kansas City He serves as a director of Endeavour Financial Corp (EDV on the TSX exchange) He is an active member of the Cayman Islands Society of Professional Accountants and the local chapter of the CFA Institute Professor McManus volunteers as a “professional” Santa each December, enjoys travel, golf, and scuba diving, and is an audio/video enthusiast Daniel F Viele is Professor of Accounting and currently serves as Associate Vice President for Academic Affairs at Webster University He teaches courses in financial, managerial, and cost accounting, as well as accounting information systems He has developed and taught numerous online graduate courses and for his leadership role in pioneering online teaching and learning, the university presented him with a Presidential Recognition Award Professor Viele’s students and colleagues have also cited his dedication to teaching and innovative use of technology and in 2002 Webster awarded him its highest honor—the Kemper Award for Teaching Excellence Prior to joining Webster University in 1998, he served as a systems consultant to the graphics arts industry, and his previous teaching experience includes 10 years at Millikin University with Professor Marshall Professor Viele holds an M.S in Accounting from Colorado State University and has completed the Information Systems Faculty Development Institute at the University of Minnesota and the Advanced Information Systems Faculty Development Institute at Indiana University He is a member of the American Accounting Association and the Institute of Management Accountants where he has served as President of the Sangamon Valley Chapter and as a member of the National Board of Directors Professor Viele enjoys sports of all kind, boating, and a good book mar27068_fm_i-xxii, 1.indd v 11/13/09 6:28:30 PM Preface VI Welcome to the Ninth Edition of Accounting: What the Numbers Mean We are confident that this text and supplemental resources will permit the achievement of understanding the basics of financial reporting by corporations and other enterprises Accounting has become known as the language of business Financial statements result from the accounting process and are used by owners/investors, employees, creditors, and regulators in their planning, controlling, and decision-making activities as they evaluate the achievement of an organization’s objectives Active study of this text will allow you to acquire command of the language and help you become an informed user of accounting information Accounting issues are likely to touch the majority of career paths in today’s economy Students whose principal academic interests are not in accounting, but who are interested in other areas of business or nonbusiness areas, such as engineering, behavioral sciences, public administration and prelaw programs, will benefit from the approach used in this book Individuals aspiring to an MBA degree or other graduate programs that focus on administration and management, who not have an undergraduate business degree, will benefit from a course using this text Accounting: What the Numbers Mean takes the user through the basics: what accounting information is, how it is developed, how it is used, and what it means Financial statements are examined to learn what they and not communicate, enhancing the student’s decision-making and problem-solving abilities from a user perspective Achieving expertise in the preparation of financial statements is not an objective of this text In short, we have designed these materials to assist those who wish to learn “what the numbers mean” without concentrating on the mechanical aspects of the accounting process Best wishes for successful use of the information presented here Wa mar27068_fm_i-xxii, 1.indd vi 11/13/09 6:28:32 PM Putting the Pieces Together Preface VII Named after a Chinese word meaning “sparrow,” mah-jongg is a centuries-old game of skill The object of the game is to collect different tiles; players win points by accumulating different combinations of pieces and creating patterns We’ve chosen mah-jongg tiles as our cover image for the ninth edition of Accounting: What the Numbers Mean because the authors show students how to put the pieces together and understand their relationship to one another to see the larger pattern By focusing on the meaning of the numbers used in financial statements, students develop the crucial decision-making and problem-solving skills needed to succeed in any professional environment Marshall continues to be the market-leading text for the Survey of Accounting course, helping students to succeed through clear and concise writing, a conceptual focus, and unparalleled technology support Clear Instructors and students alike have praised Accounting: What the Numbers Mean for its effectiveness in explaining difficult and important accounting concepts to all students, not just future accountants Instructors consistently point out that students find this text much less intimidating and easier to follow than others they have used Concise In concentrating on the basics—what accounting information is, what it means, and how it is used—Accounting: What the Numbers Mean does not overwhelm students with encyclopedic detail The emphasis on discovering what financial statements communicate and how to better use them (as well as other pieces of accounting information) facilitates student comprehension of the big picture Conceptual Accounting: What the Numbers Mean focuses on helping students understand the meaning of the numbers in financial statements, their relationship to each other, and how they are used in evaluation, planning, and control Technical details are minimized wherever possible, allowing instructors to highlight the function of financial statements, as opposed to their formation Technology To meet the evolving needs of instructors and students, the ninth edition features a far more extensive technology support package than ever before An expanded Online Learning Center includes a wealth of self-study material for students McGraw-Hill’s Connect Accounting lets instructors assign, collect, and grade homework online In addition, McGraw-Hill’s Connect Accounting Plus gives students the ability to work with an integrated eBook while managing and completing homework online mar27068_fm_i-xxii, 1.indd vii 11/13/09 6:28:33 PM Preface What Makes Accounting: What Such a Powerful Learning Tool? VIII the Numbers Mean • Business in Practice Throughout each chapter, these boxes highlight and discuss various business practices and their impact on financial statements Seeing the real-world impact of these business practices helps students more completely understand financial statements in general • What Does It Mean? As students progress through each chapter, What Does It Mean? questions prompt students to self-test their understanding following coverage of key topics What Does It Mean? answers are provided in the end-ofchapter section • Study Suggestion Here the authors offer advice and tips to students to help them better grasp specific chapter concepts • Business on the Internet These boxes direct students’ attention to the Internet for a fresh perspective on how the concepts they’ve just learned are applied in a modern context • Intel 2008 Annual Report Excerpts from Intel’s annual report are included as an appendix at the back of the book Frequent references to this material are made in the financial chapters of the text The Intel icon is located next to end-of-chapter material that requires the student to call upon this real-world resource The inclusion of annual report data piques student interest and provides valuable hands-on experience mar27068_fm_i-xxii, 1.indd viii 11/13/09 11:23:26 PM IX More great pedagogy to guide student learning, and extensive end-of-chapter material to challenge students in applying what they have learned • Chapter Summaries and Key Terms and Concepts promote greater retention of important points and definitions as well as facilitate review • Demonstration Problems drive students to the Marshall/McManus/Viele Online Learning Center (www.mhhe.com/marshall9e) to view a fully worked-out problem with solution • Self-Study Quizzes are an additional online resource located on the Online Learning Center (www mhhe.com/marshall9e) They help students test their knowledge and understanding of chapter concepts Results are tabulated and can be routed to multiple email addresses if necessary • Self-Study Material features multiple choice and matching questions Answers for this section are given on the final page of each chapter • Exercises give students a chance to practice using the knowledge gained from working through the chapter material • Problems challenge students to apply what they have learned Specific problems are tied to the Intel 2008 Annual Report, excerpts of which are included at the back of the text, bringing a strong, real-world flavor to the assignment material • Cases allow students to think analytically about topics from the chapter and apply them to business decisions • A Continuous Case is provided for Chapters x e cel accounting mar27068_fm_i-xxii, 1.indd ix 4, 6, and 11 to allow the student to link concepts learned in earlier chapters to what they learn in later chapters It also allows for an understanding of how the material works together to form a larger picture • Icons identify exercises, problems, and cases involving ix Excel Templates, the 2008 Intel Annual Report, Connect Accounting, and Web-based Excel Tutors 11/12/09 9:59:15 AM 746 Appendix ITIM 9, CHANGES IN AND DISAGREEMENTS T\TTH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable ITEM A CONTROLS AM) PROCEDURES Evaluation of Dr.d'jim e Controls and Piw«Uirf 7Based on management's valuation (tilth the participation of cur CEO and Chief Financial Officer (CFO)} as of the end cf the period covered by diis report, our CEO and CFO haw concluded that our disclosure controls and procedures (as defined in Rules Ba-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the ome periods specified in SEC rules and forms, and is accumulated and communicated ro management including our pnndpal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure Changes in Internal Control Over Financial Reporting There were no changes to our internal control over financial reporting (as denned in Rules I3a-15(f) and 15d-l5(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting Management Repert on Internal Control Over Financial Repot tin; Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Roles 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for exrernal purposes in accordance with U.S generally accepted accounting principles Management assessed our internal control over financial reporting as of December 27 2003 the end of our fiscal year Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Orgamzanons of the TreacJway Commission Management's assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment Based on oui assessment management has concluded that our internal control over firvmrtaj reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with US generally accepted accounting principles We reviewed the results of management's assessment with the Audit Committee of our Board of Directors Our independent registered public accounting firm, Ernst & Young LLP independently assessed the effectiveness of the company's internal control over financial reporting Ernst & Young has issued an attestation report concurring with management's assessment which is included at the end of Part H Item S of this Form 0-K Inherent Limitations on Effectiveness of Controls Our management including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud A control system, no matter how well designed and operated can provide only reasonable, not absolute, assurance that the control system's objectives will be met The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud if any flaw been detected These inherent limitations include the reahnes that judgments in decisionmaking can be faulty and that breakdowns can occur because of simple error or mistake Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls The design of any system of controls is based in part on certain assumptions about the hlelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions Projections of any evaluation of controls effectrveness to future period: are subject to risks Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies a procedures ITEM SB OTHER INFORMATION None 115 mar27068_app_678-748.indd 746 11/13/09 7:38:50 PM Appendix 747 PABTm ITEM 10 DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The LLfcinuaucn m our 2009 Ptoxy Statement regarding directors and executive officers appearing under the headings "Proposal 1: Election of Directors' and 'Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference in this section The infonnaQDn under the heading 'E^cuhve Officers of the Registrant' in Part L item of this Form 10-K is also incorporated by reference in this section In addition, the information under the beading "Corporate Governance" in our 2009 Proxy Statement i> incorporated by reference in this section The Intel Code of Conduct (Code) is our code of ethics document applicable to ail employees, including all officers, and including our independent directors, who are not employees of the company, with regard m their Intel-related activities Tne Code incorporates our guidelmes designed to deter wrongdoing and to piomote honest and ethical conduct and compliance with applicable laws and regulations The Code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in out filings with the SEC and other public communications In addition, the Code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations: reportmf Code violations; and maintaining accountability for adherence to the Code The full text of our Code is published on our Investoi Relations website at ww.intc.com We intend to disclose future amendments to certain provisions of our Code, or waivers of such, provisions granted to executive officers and directors, on the web site within four business days following the dace of such amendment or waiver ITEM 11 EXEQTIVE COXff ENSATION The information appearing m our 2009 Proxy Statement under the headings "Director Compensation," "Compensation Discussion and Analysis." "P.epcrt of the Compensation Committee." and "Executive Compensation" is incorporated by reference in this section ITEM II SECOITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER OTTERS The information appearing m our 2009 Proxy Statement under the beading "Security Ownership of Certain Beneficial Owners and Management" is incorporated by reference m this section Information regarding shares authorized for issuance under equity compensation plans approved and not approved by stockholders m our 2009 Proxy Statement under the heading "Proposal 3: Approval of Amendment and Extension of the 2006 Equity Incentive Plan"7 is incorporated by reference in this section ITEM IJ CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information appearing m our 2009 Proxy Statement under the headings "Corporate Governance" and "Certain Relationships and Related Transactions" is incorporated by reference in this section ITEM 14 PRINCIPAL ACCOrMING FEES AND SERVICES The infonoaaon appearing in our 2009 Proxy Statement under the headings "Report of the Audit Committee" and ^Proposal 2: Ratificaaon of Selection of Independent Registered Public Accounting Firm" is incorporated by reference in this section 116 mar27068_app_678-748.indd 747 11/13/09 10:41:14 PM This page intentionally left blank Index A Abandonment of assets, 361 Abbott Labs, Inc., 16 Absentee owners, Absorption costing system, 513–515, 520 Accelerated Cost Recovery System (ACRS), 204–208, 227; see also Depreciation Accelerated depreciation methods, 204, 227 Account balance, 109, 126 Account format, 110 Accounting, 2–31 for bonds payable, 261 business financial reporting concepts in, 17–20 definition of, 3–9, 24 early history of, ethics in, 15–17 future of, 668–677 as profession, 669–672 students of, 675–676 technology in, 672–675 Intel Corporation policies for, 691–699 nonbusiness organization financial reporting in, 21 profession of, 9–10 standards of, 10–14 textbook organization, 21–23 for variances, 594–595 Accounting changes, 395, 404 Accounting entities, 47 Accounting equation as accounting process key, 47 description of, 35, 55 owners’ equity to balance, 44 Accounting Principles Board (APB), of American Institute of Accountants, 10 Accounting rate of return, 637, 643, 647 Accounting Research Bulletins (American Institute of Accountants), 10 Accounts chart of, 109 definition of, 55 transaction analysis of, 119 transactions in, 33 uncollectible, 155–158 valuation, 157 Accounts payable, 37, 55, 253, 274 Accounts receivable administrative controls on, 150 cash discounts as, 158–159 definition of, 37, 55 inventory reduction effect on, 146 notes receivable versus, 159 number of days’ sales in, 418–419, 552 turnover measure for, 416 uncollectible, 155–158 Accrual accounting accounting rate of return and, 637 bookkeeping adjustments in, 115–116 capital projects and, 642 cash flows versus, 50 Accrual accounting—Cont of interest, 154–155 overview of, 20, 24, 55, 126 retained earnings and, 301 revenue recognition in, 49 Accrued current liabilities, 257–258 Accrued expenses, 246 Accrued liabilities, 37, 55 Accrued pension cost, 393, 404 Accrued wages, 116, 126 Accumulated amortization, 214 Accumulated deficit, 41, 302, 317 Accumulated depreciation, 37, 55, 204 Accumulated other comprehensive income and loss, 293, 306–309 Accumulation, cost, 498–501 Acid-test ratio, 82–83, 89 Acquisition costs, of buildings and equipment, 202 Acquisitions, in Intel Corporation annual report, 714 Activity-based budgeting, 561 Activity Based Costing Benchmarking Association (ABCBA), 518 Activity-based costing (ABC) system, 515–520 Activity-based management (ABM), 519–520 Activity measures for financial statement analysis, 416–420 Adams, Scott, 620 Additional paid-in capital, in owners’ equity, 40, 55, 301, 317 Adjustments bookkeeping, 115–119, 126 for direct costing, 514 in flexing budgets, 586 foreign currency translation, 307–309 prior period, 302 to valuation, 156 Administrative controls, 150, 176 Agile Manufacturing Benchmarking Consortium, 595 Aging of accounts, 156 AICPA; see American Institute of Certified Public Accountants (AICPA) Allocated costs, 622, 647 Allocation of scarce resources, 634–635 Allowance for Uncollectible Accounts/Bad Debts, 156, 176 American Accounting Association, 11 American Institute of Accountants, 10 American Institute of Certified Public Accountants (AICPA), 669 accounting changes and, 395 annual reports reviewed by, 168 continuing education and, 6–7 ethics code of, 15 history of, 9–11 on indirect method presentation of statement of cash flows, 362 preferred stock survey of, 300 standardized auditors’ report of, 400 American Institute of Certified Public Accountants (AICPA)—Cont Vision Project of, 670 Web site of, 14 American Productivity & Quality Center (APQC), 595 American Red Cross, Amortization bond, 261–262, 264–265 definition of, 227 discount, 361 of intangible assets, 213–214 Annual percentage rate (APR), 250, 274 Annual reports; see also Auditors; Financial statements; Intel Corporation auditor’s report in, financial statements in, 33, 53 overview of, 6, 24 Annuities bond interest as, 261 definition of, 227 future value of, 220–221 present value of, 223–226 Appraisal techniques, 51 Appreciation, of land value, 202 APQC (American Productivity & Quality Center), 595 Arrears, dividends in, 299 Arthur Andersen Co., 12, 389, 669 Articulation, 120 Assets; see also Current assets; Noncurrent assets benefit plan, 393 contra, 156, 204 definition of, 35–37, 55 impairment losses to, 351 intangible, 213–217, 228, 393 operating, 416 return on, 77 sale or abandonment of, 361 trading, 704 turnover measure for, 79–80, 89, 416 Assignment, cost, 498–501, 503 Attainable standards, 557, 563 Auditors independence of, 12 independent report of, 388, 400–402, 743–744 Institute of Internal Auditors for, 14 overview of, 7–8, 24 planning and budgeting functions reviewed by, 560 Authorized shares, of common stock, 297–298, 317 Available-for-sale securities category, 154 Average collection period, 419 B Backdating stock option grants, 394 Bad debts/uncollectible accounts, 155–158, 176 749 mar27068_index_749-762.indd 749 11/12/09 10:05:08 AM 750 Index Balanced scorecard, 600–603 Balanced Scorecard Institute, 601 Balances, account, 109, 126 Balance sheet adjustments effect on, 118 budgeted, 554–556 description of, 55 events subsequent to date of, 397 Intel Corporation example of, 688 LIFO inventory evaluation and, 167 marketable securities valuation for, 152–154 overview of, 33, 35–38 transaction analysis of, 121 Balance sheet equation, 35, 55, 105–107, 115 Bank reconciliation, as cash control, 150–152, 176 Bankruptcy, 2, 294, 428, 669 Banks, 151–152, 154, 176 Bar codes, 673 Basic earnings per share, 352, 366 Batch manufacturing, 513 Betterments, 207 BigCharts.com Web site, 317 Bloomberg.com Web site, 317 Board of directors, 294–296, 636, 747 Bonds debenture, 267, 274 discount on, 259, 261, 274 indenture for, 267, 274 junk, 428 mortgage, 267, 275 premium on, 259, 265, 274 Bonds payable; see also Long-term debt description of, 259, 274 discount amortization of, 361 interest expense recognition on, 264–266 original issuance of, 261–264 preferred stock versus, 300 retirements and conversions of, 266–267 Bonus plans, 269 Bookkeeping, 104–145 adjustments in, 115–119 Allowance for Uncollectible Accounts/ Bad Debts in, 156 balance sheet equation in, 105–107 concepts and principles of, 49–50 description of, 6, 24 financial statements and, 112–115 history of, jargon and procedures in, 108–112 transaction analysis methodology in, 119–124 transactions and, 107–108 Book of original entry, 111 Books, closing, 119–120 Book value, 204, 209 Book value per share, 429–430, 436 Borrowings, in Intel Corporation annual report, 719–721 Brand names, 213 Break-even point analysis, 467–472, 477 Brokerage firms, 316 Budget allowance, 586 mar27068_index_749-762.indd 750 Budgeting analytical purposes of, 561–562 balance sheet for, 554–556 capital, 621, 637–640, 644, 647 cash, 552–554 cost of goods sold, 550 definition of, 538, 563 flexible, 585–586, 589 income statement for, 551–552 operating, 550–551, 635, 644 overview of, 541–542 performance reporting and, 584–585 process of, 543–547 purchases/production, 547–550 time frame of, 542–543 Budget slack, 551, 563 Budget variance, 587, 603 Buildings and equipment, 202–210 acquisition costs of, 202 depreciation of, 202–207 disposal of depreciable, 209–210 maintenance and repair expenses of, 207–209 Bush, George W., 11 Business combinations, 395, 404 Business financial reporting concepts, 17–20 Business for Social Responsibility (BSR), 16 Business organization, 34 Business segments, 397–398, 596–598 Business-to-business transactions, 113 BusinessWeek, 88, 317 Buyouts, leveraged, 428 C Calculators, financial, 222 Callable bonds, 266, 274 Callable preferred stock, 300, 317 Call premiums, for bonds, 266 Capacity constraints on, 634 full, 626–628, 647 idle, 626–628, 647 Capital cost of, 636–637 in excess of par value, 301, 317 legal, 296 in proprietorships and partnerships, 313 Capital additions, 361 Capital budgeting, 621, 637–640, 644, 647 Capital expenses, 554 Capital gains and losses, 422 Capitalizing, expensing versus, 201, 207, 227, 305 Capital leases, 211–213, 227 Capital stock, 40, 294, 318; see also Common stock; Owners’ equity Capital structure, 258, 427 Capital surplus, 301 Careers in accounting, Carrying costs, 548 Carrying value, 156, 176, 204, 251, 266 Cash budgeting for, 545, 552–554 in capital budgeting, 644 as current asset, 55, 148–152 definition of, 176 Cash—Cont discounts as, 158–159, 176, 253–255 dividends as, 302–303, 310 Cash flows accrual accounting versus, 50 cost of capital effect on, 637 definition of, 24, 37, 368, 647 long-run analysis of, 640–642 statement of, 358–368 activities in, budgeted, 555 content and format of, 358–361 definition of, 57 Intel Corporation example of, 689 interpreting, 361–365 purpose of, 41–43 transactions to, 33 Casualty losses, 271–272 Caterpillar, Inc., 160 Caux Round Table (CRT), 16 CCH Management, 472 Center for Financial Research Analysis, 389 CEO letter in annual report, example of, 681–682 Certified Internal Auditors (CIAs), Certified Management Accountants (CMAs), 7, 24, 669 Certified Public Accountants (CPAs), 5–6, 8, 24, 669; see also American Institute of Certified Public Accountants (AICPA) Charges, 109, 126, 173, 177, 264 Chartered Financial Analysts Institute, 11 Chart of accounts, 109, 126 Checks, 151, 178 Cisco Systems, Inc., 16 Closing the books, 119–120, 126 CNN Money, 317 COD (collect on delivery), 84, 89, 149, 177 Code of Professional Conduct (American Institute of Certified Public Accountants), 15 Collateral, 159, 177 Collateral trust bonds, 267, 274 Collections, 156, 419; see also Accounts receivable Collect on delivery (COD), 84, 89, 149, 177 Commercial paper, 149, 154, 177 Committed costs, 541, 563 Commodity processing, 544 Common fixed expenses, 596, 603 Common size financial statements, 430–432, 436 Common stock cash flows from sale of, 42 description of, 40, 55, 318 earnings per share of, 393–394 Intel Corporation repurchase of, 730 in paid-in capital, 294–298 Comparability, of firms, 52 Comparative financial statements, 43–44 Compensation, deferred, 269 Competition, 475 Compounding frequency, 219, 226–227 Comprehensive income and loss, accumulated, 306–309 11/12/09 10:05:08 AM Index Comptrollers, Computerized accounting systems, 672–675 Conservatism principle, 51, 202, 272 Consistency principle, 50–52, 168, 202 Consolidated financial statements, 270, 274, 392 Contingencies, in Intel Corporation annual report, 736–739 Contingencies and commitments, disclosure of, 396–397, 404 Contingent liabilities, 271–272, 274 Continue or discontinue segments decision, 631–634 Continuous budget, 543 Continuous improvement, 560 Contra assets, 156, 177, 204 Contra liabilities, 252, 274 Contributed capital, 306; see also Common stock; Preferred stock Contribution margin model in break-even analysis, 467 capacity constraints and, 634–635 in capital budgeting, 644 for cost of goods manufactured budget, 549 for cost-volume-profit (CVP) analysis, 463–466 description of, 461, 477 dot-com companies and, 475 as income statement format, 459, 477 in special pricing decision, 626, 628 Contribution margin ratio, 463, 473, 477 Control, 580–619 administrative, 150, 176 of cash, 150–152, 176 cost classification for, 581–582 financial, 150, 177 Intel Corporation reporting of, 746 internal systems for, 149–150, 177, 560 of inventories, 559 Management Report on Internal Control over Financial Reporting, 388, 398, 404 organizational unit analysis for, 596–602 balanced scorecard for, 600–602 investment center analysis in, 598–600 segment reporting in, 596–598 performance reporting for, 583–586 planning and control cycle for, 452, 495–496, 538, 620 quality standards for, 559 Sarbanes-Oxley (SOX) Act of 2002 reporting requirements on, 16 Securities and Exchange Commission (SEC) and, 16 standard cost variance analysis for, 586–595 accounting for variances in, 594–595 of fixed overhead variances, 592–594 of variable cost variances, 586–592 Controllers, 6, 24 Convergence, in accounting standards, 671 Conversions, of long-term debt, 266–267 Convertible bonds, 267, 274 Convertible preferred stock, 300, 318 Copyrights, 213–215, 227 Corporate charter, 294 mar27068_index_749-762.indd 751 Corporate governance, 386–391, 404 Corporations; see also Common stock; Owners’ equity bankruptcies of, 669 description of, 34, 56 in Industrial Revolution, Internet use of, 673 investing in securities of, 316 multinational, 670 parent and subsidiary, 48 Costs; see also Control; Decision making acquisition, 202 allocated, 622 carrying, 548 classifications of, 454–457, 500 committed, 541 declining, 166 differential, 622, 647 direct, 499 discretionary, 541 fixed, 455–456, 461–462, 464, 471–473, 514 of held-to-maturity securities, 152 indirect, 499, 501 in least cost projects, 642 management of, 496, 520 opportunity, 623 period, 501–502 relevant, 623–635 in continue or discontinue segment decision, 631–634 definition of, 648 in make or buy decision, 629–631 in scarce resource allocation decision, 634–635 in sell or process further decision, 624–625 in special pricing decision, 625–628 in target costing question, 628–629 replacement, 203 rising, 165–166 semivariable, 456 standard, 539, 556–561 sunk, 623 variable, 455, 460, 462, 464, 472–473, 514 variance analysis of accounting for variances in, 594–595 of fixed overhead variances, 592–594 of variable cost variances, 586–592 Cost accounting, 494–537 cost accumulation and assignment in, 498–501 cost management in, 495–498 definition of, 520 overview of, 7, 24 systems for, 501–519 absorption and direct, 513–515 activity-based, 515–519 characteristics of, 501–512 job order, process, and hybrid, 512–513 Cost Accounting Standards Board (CASB), 12, 25 Cost accumulation, 497–501, 520 Cost assignment, 497–501, 503, 520 751 Cost behavior pattern, 455–459, 462, 477, 558, 581 Cost center, 597–598, 603 Cost classifications, 540–541, 581–582, 622–623 Cost distortion, 516–517, 520 Cost drivers, 515, 520 Cost-flow assumptions for inventories, 162–165, 167–168, 177 Cost formula, 456, 461 Costing absorption, 513–514 activity-based (ABC), 515–520 direct, 513–515, 520 hybrid, 512–513 job, 673 job order, 512–513 process, 512–513 standard costs for, 558–559 target, 625, 628–629 Cost object, 498, 520 Cost of capital, 636–637, 647 Cost of goods sold; see also Inventories budgeting for, 549–550 calculation for, 511 definition of, 39, 56, 366 on income statement, 346–348 inventory evaluation effect on, 165 in inventory turnover calculation, 417 statement of, 507, 521 Cost of goods sold model, 169, 177, 346, 366 Cost per unit of input variance, 587, 589, 603 Cost pools, 498, 520 Cost principle, 48–49, 52, 202 Cost-volume-profit (CVP) analysis, 457–475 break-even point analysis in, 467–472 cost behavior patterns in, 457–459 description of, 450, 477 direct costing systems for, 513 example of, 472 expanded contribution margin model for, 463–466 modified income statement format for, 459–463 operating leverage in, 472–475 sales mix considerations for, 467–468 Coupon bonds, 267, 274 Coupon rate of interest, 262, 274 Credit in bookkeeping, 109, 126 deferred, 253–256, 265 revolving line of, 249, 275 terms of, 158, 177 Credit cards, 109 Credit crisis of 2008, 154 Creditors, accounting information and, 4, 25 Credit ratings, 158, 417 Credit risk, 84, 89, 713–714 CRT (Caux Round Table), 16 Cumulative dividends, 299, 318 Cumulative foreign currency translation adjustment, 307–309, 318 Cumulative voting, of corporate directors, 296, 318 11/12/09 10:05:09 AM 752 Index Current assets, 146–197; see also Assets; Noncurrent assets accounts receivable as, 155–159 on balance sheet, 148 cash and cash equivalents as, 148–152 deferred tax assets as, 174 definition of, 37, 56 inventories as, 160–172 accounting alternatives for, 168–170 cost-flow assumptions for, 162–165, 167–168 errors in, 171–172 inflation and deflation effects on, 165–166 lower of cost or market valuation of, 172 overview of, 160–162 quality changes in, 166–167 marketable securities as, 152–155 notes receivable as, 159–160 prepaid expenses as, 173–174 in working capital, 82 Current liabilities, 249–258; see also Noncurrent liabilities accounts payable as, 253 accrued, 257–258 deferred credits or unearned revenue as, 253–256 definition of, 37, 56 in Intel Corporation annual report, 719–721 long-term debt current maturities as, 252–253, 274 payroll taxes and withholdings as, 256–257 short-term debt as, 249–252 in working capital, 82 Current ratio, 82, 89 Customer lists and relationships, 213 CVP analysis; see Cost-volume-profit (CVP) analysis D Database management systems, 674 Database mining technology, 674 Database warehouses, 674 “Data-capturing,” 113 Data protection, 113 Days’ sales in accounts receivable, 418, 437, 552 Days’ sales in inventory, 418, 437 Debenture bonds, 267, 274 Debit cards, 109 Debits, 109, 126 Debt “bad,” 155–158 cash flow impact of, 364 cash flows from, 42 definition of, 37 in Intel Corporation annual report, 719–721 interest deductibility with, 426 long-term current maturities of, 252–253 interest expense recognition for, 264–266 mar27068_index_749-762.indd 752 Debt—Cont original issuance of bonds payable, 261–264 overview of, 258–261 retirements and conversions of, 266–267 terminology for, 267–268 preferred stock versus, 300 short-term, 249–252 in trading and available-for-sale categories, 154 Debt/equity ratio, 427, 436 Debt ratio, 427, 436 Decision making, 620–657 cost classifications in, 622–623 long-run analysis for, 635–644 accounting rate of return for, 643 capital budgeting in, 637–640, 644 cash flow considerations in, 640–642 on cost of capital, 636–637 estimates in, 640 on investments, 635–636, 643–644 least cost projects in, 642 payback method for, 642–643 working capital investment in, 642 short-run analysis for, 623–635 continue or discontinue segments in, 631–634 make or buy decision in, 629–631 relevant costs in, 623–624 scarce resource allocation in, 634–635 sell or process decision in, 624–625 special pricing decision in, 625–628 target costing question in, 628–629 Declaration date, for dividends, 304, 318 Declining-balance accelerated depreciation method, 205–206, 208, 227 Deductibility, from taxes, 174, 300, 426 Deferred charges, 173, 177, 264 Deferred compensation, 269 Deferred credits, 253–256, 265, 275 Deferred income taxes, 393 Deferred tax assets, 174, 177 Deferred tax liabilities, 173, 177, 275, 428 Deficit, 41, 302 Deflation, 165–166 Deloitte Touche Tohmatsu, Depletion, of natural resources, 217, 227 Deposits in transit, 151, 177 Depreciation amortization expense with, 214 asset disposal and, 209–210 of buildings and equipment, 202–207 in capitalizing versus expensing decision, 201 capital projects and, 641 deferred tax liabilities and, 268 definition of, 37, 56 in explanatory notes to financial statements, 392 income tax impact of, 208 in statement of cash flows, 42 turnover affected by, 416 Depreciation expense, 42, 56 Derivative instruments, Intel Corporation, annual report notes on, 711–713 Differential costs, 622, 647 Dilbert comic strip (Adams), 620 Diluted earnings per share, 352–354, 366, 421 Dilution, 354, 367 Direct costing system, 513–515, 520 Direct costs, 499, 501, 520 Direct fixed expenses, 596, 603 Direct labor, 501, 520 Direct labor efficiency variance, 587, 603 Direct labor rate variance, 587, 603 Direct method presentation, for statement of cash flows, 358 Directors, board of, 294–296, 636, 747 Disaster prevention and recovery, 113 Disclosures of capital leases, 211 in explanatory notes to financial statements, 395–398 Securities and Exchange Commission requirements for, 51, 386, 388 on Web sites, 674 Discontinued operations, 356 Discount amortization of, 361 bond, 259, 261 cash, 158–159, 176, 253–255 in present value calculation, 222, 227 Discount loan interest calculation, 250–251, 275 Discount rate, 637 Discretionary costs, 541, 563 Divestitures, in Intel Corporation annual report, 715 Dividend payout ratio, 424, 436 Dividends accounting for, 108 cash, 302–303, 310 in cash budget, 554 cash flows affected by, 42 definition of, 40, 56, 318 preferred versus common stock, 298–299 regular versus extra, 425 retained earnings and, 301 stock, 303–306, 310 Dividend yield, 423–424, 436 Dollars, as units of measurement, 48 Dot-com companies, 345, 475 Double-declining-balance accelerated depreciation method, 205 Double-entry bookkeeping system, Dow Jones & Company, 317 Downsizing, corporate, 351 “Drawing” accounts, 313 Dun & Bradstreet credit reporting service, 84 DuPont Model expansion on return on investment, 79–81, 89, 398, 418, 598–599 Dysfunctional behavior, in management, 599 E Earned capital, 306; see also Retained earnings Earned revenue, 342, 367 Earnings multiple, 421, 436 Earnings per share (EPS) basic and diluted, 352–354 conversions and options effect on, 423 11/12/09 10:05:09 AM Index Earnings per share (EPS)—Cont definition of, 56 in explanatory notes to financial statements, 393–394 on income statement, 39 in Intel Corporation annual report, 731 in price/earnings ratio, 421 e-banking systems, 152 e-commerce, 113 Economies of scale, 475 Effective interest method of amortization, 266 Effective interest rate, 251 Efficiency variance, 587–588 Electronic delivery of proxy materials, 53 Electronic transaction flows, 673 Embezzlement, 149 Emerging technologies, 475 Employees accounting information and, benefit plan obligations for, 20, 269, 393 Intel Corporation incentive plans for, 726–730 Employers’ Accounting for Defined Benefit Pension Plans and Other Postretirement Plans (Statements of Financial Accounting Standards), 20 Enron Corporation, 389 accounting standards and, 11 auditors’ consulting services and, 12 bankruptcy filing of, cash flows versus accrual accounting in, 50 Enterprise resource planning (ERP) systems, 113 Entities, 3, 25, 47 Entries, journal, 111, 126 Environmental hazards, 271–272 EPS; see Earnings per share (EPS) Equipment; see Buildings and equipment Equity; see Owners’ equity Equity incentive plans, 394 Equivalent units of production, 513, 521 Ernst & Young, Estimates, 52, 640 Ethics, accounting, 15–17 Events subsequent to balance sheet date, 397 Exception, management by, 583, 604 Exchange rates, 307–308 Ex-dividend date, 304, 318 Expenses; see also Income statements; Liabilities accrued, 246 amortization, 214 bad debt, 156 capital, 554 common fixed, 596 definition of, 38, 56, 366 direct fixed, 596 general, selling, and administrative, 350, 511 on income statement, 345–346 income tax, 352 interest calculation methods for, 249–252 deductibility of, 300, 426 on long-term debt, 264–266 mar27068_index_749-762.indd 753 Expenses—Cont maintenance and repair, 207–209 net pension, 393 “noncontrollable,” 584 operating, 350, 550–551 period costs as, 501 prepaid, 173–174 Expensing, capitalizing versus, 201, 207, 227 Explanatory notes to financial statements, 391–398; see also Intel Corporation definition of, 404 details of other financial statement amounts in, 395 disclosures in, 395–398 overview of, 386 significant accounting policies in, 391–395 Extensible Business Reporting Language (XBRL), 674 Extra dividends, 425, 437 Extraordinary items, on income statement, 356–357, 367 F Face amount, of bonds, 259, 262, 275 Fair market value, 393, 396, 699–704 Fair value method, of stock option accounting, 394 Favorable variances, 583, 587–588, 603 Federal income tax withholding, 256 Federal Trade Commission (FTC), 214, 628 Feedback, from performance reporting, 620 FICA tax, 256, 275 FIFO (first-in, first-out) cost-flow assumption cost of goods sold impact of, 165 definition of, 177 example of, 163–164 in explanatory notes to financial statements, 392 inflation and deflation effects on, 165–166 inventory quality effects on, 166–167 in perpetual inventory system, 170 prior period adjustments for, 302 selecting, 167–168 Financial accounting managerial accounting versus, 451–454 overview of, 6–7, 25 Financial Accounting Foundation (FAF), 10 Financial Accounting Standards Board (FASB) accounting changes based on, 395 on capital leases, 211 on cumulative foreign currency translation adjustment, 308 description of, 25 on expenses, 345 inflation-adjusted data and, 52, 397 International Accounting Standards Board (IASB) standards and, 672 on noncontrolling interests, 271, 311–312 on pension accounting, 270, 393 on present value concept, 221 on reporting comprehensive income, 306–307 on revenues, 340–342 on statement of cash flows format, 358 753 Financial Accounting Standards Board (FASB)—Cont Statements of Financial Accounting Concepts of, 10, 15, 17–20 Statements of Financial Accounting Standards (SFAS) of, 10–11, 17, 20 on stock options, 394 Web site of, 14 Financial calculators, 222 Financial controls, 150, 177 “Financial engineering,” Financial Executives International, 11 Financial leverage definition of, 275 measures of, 425–429, 437 ROI versus ROE as, 259–260 Financial reporting, 17–21; see also Financial statements Financial review, 386, 404 Financial statements, 32–73; see also Balance sheet; Cash flows; Explanatory notes to financial statements; Income statements; Intel Corporation; Owners’ equity absorption costing for, 513–514 accounting concepts and principles in, 47–53 analysis of, 414–448 activity measures for, 416–420 book value per share for, 429–430 common size, 430–432 leverage measures for, 425–429 liquidity measures for, 415–416 profitability measures for, 420–425 in annual report, 53 balance sheet, overview of, 35–38 bookkeeping transactions and, 112–115 comparative, 43–44 compilations of, 402–403 example of, 34–35 explanatory notes to, overview of, 395 five-year summary of, 399–401 income statement, overview of, 38–40 Internet-based, 674 interpretation of, 74–103 DuPont Model expansion on return on investment, 79–81 return on equity (ROE), 81–82 return on investment (ROI), 76–79 trend analysis for, 84–88 working capital and liquidity measures, 82–84 relationships in, 44–47 statement of cash flows, overview of, 41–43 statement of changes in owners’ equity, overview of, 40–41 transactions for, 33–34 Financial Times, The, 88 Financing activities, cash flows from, 42, 359–361, 364 Financing leases, 212 Finished goods inventory, 169, 177, 503, 521 Firewalls, 113 First-in, first-out cost-flow assumption; see FIFO (first-in, first-out) cost-flow assumption Fiscal year, 35, 56 11/12/09 10:05:09 AM 754 Index Five-year summary of financial data, 399–400, 404 Fixed costs activity level and, 581–582 allocated, 584, 625 in break-even analysis, 471–473 in continue or discontinue segments decision, 632–633 contribution margin to cover, 464 in cost formula, 461–462 in cost of goods manufactured budget, 549 in cost to volume of activity relationship, 455–456 definition of, 478, 563 direct costing effects on, 514 organizational unit analysis of, 596 overhead as, 626 planning for, 540 in special pricing decision, 628 variance analysis of, 592–594 Flexible budget, 585–586, 603 Flexible manufacturing, 513 Flexing the budget, 586, 589 Floating-rate notes, 154 Flow of costs, 502 FOB destination shipping terms, 344, 367 FOB shipping point shipping terms, 344, 367 Forced liquidation, 294 Forecasting models, 544 Foreign Corrupt Practices Act of 1977, 16 Foreign currency translation adjustment, cumulative, 307–309 Form 10-K filings, 398; see also Intel Corporation Fortune magazine, 87–88, 317 401(k) plans, 316 Franchises, 213 Freight collect, 344, 367 Freight prepaid, 344, 367 Freight transportation, economies of scale in, 475 Full capacity, 626–628, 647 Full disclosure concept, 51, 211 Fund balances, in not-for-profit and government entities, 313 Future value calculation, 219–221, 227, 261 G Gains and losses capital, 422 definition of, 344–346, 367 on income statement, 38, 56 from sale or abandonment of assets, 361 unrealized, 154, 201 General, selling, and administrative expenses, 350, 511 General journal entry, 111 Generally accepted accounting principles (GAAP), 8, 14, 25, 302, 494, 672 Generally accepted auditing standards (GAAS), 7, 25 General Mills, Inc., 16 General Motors Corp., 270 Going concern concept, 48, 56, 402 Goodwill, 213, 215–217, 227, 393, 716 mar27068_index_749-762.indd 754 Governance, corporate, 386–391, 404; see also Intel Corporation Government Accounting Standards Board (GASB), 13–14, 25 Government organizations, 5, 8, 12–13, 313 Graphic Arts Information Network, 595 Graphic Arts Technical Foundation, 595 Great Depression, 85 Greenpeace, Gross method of recording purchases, 253–255 Gross pay, 256, 275 Gross profit/gross margin definition of, 39, 56, 367 on income statement, 348–350 ratio of, 348–349, 367 H Hacker invasions, 113 Harmonization, IASB efforts in, 14 Harvard University, 600 Hedge funds, 428 Held-to-maturity securities, 152 “High-low” method, of estimating cost behavior pattern, 459 Historical scorekeeping, accounting as, 19 Horizontal financial statement relationship model, 112, 126 Horizontal model, product and period costs in, 502 Hybrid costing system, 512–513 I IBM, Inc., 16 Ideal standards, 557, 563 Idle capacity, 626–628, 647 Illiquidity, 84 Imprest accounts, 149, 177 Income from continuing operations, 356, 367 operating in continue or discontinue segments decision, 633 contribution margin model of, 464–465 operating leverage and, 473–474 in special pricing decision, 626, 628 from operations, 39, 56, 350, 367 residual, 599–600 Income statements, 338–358 adjustments effect on, 118 alternative presentation for, 354–356 budgeted, 551–552 cost of goods sold on, 346–348 for cost-volume-profit analysis, 459–463 discontinued operations on, 356 expenses on, 345–346 extraordinary items on, 356–357 gross profit or gross margin on, 348–350 income before income tax expenses on, 352 income from operations on, 350–351 Intel Corporation example of, 687 net income and earnings per share on, 352–354 noncontrolling interest in subsidiary income on, 357–358 operating expenses on, 350 Income statements—Cont other income and expenses on, 351–352 overview of, 33, 38–40, 56 revenues on, 340–345 segmented, 596–597, 633 Income taxes absorption costing for, 513–514 accountants specializing in, asset useful life determination for, 207 business organization and, 34 on capital project cash flows, 641 depreciation impact on, 208 disclosure of, 392–393 in expensing versus capitalizing decision, 201 income before, 352, 367 on income statement, 39 inflation effect on, 167 interest deductibility from, 426 withholding of, 256 Indenture, bond, 266 Independence of auditors, 12, 15, 25 Independent auditors’ report, 7–8, 25, 388, 400–402, 743–744 Independent directors, 294, 318 Indifference point, between fixed and variable cost alternatives, 473–474, 477 Indirect costs, 499, 521 Indirect method presentation, for statement of cash flows, 358, 362 Industrial accounting, Industrial Revolution, 9, 298 Inflation data adjusted for, 52, 397 discount rate and, 222 inventory valuation effect of, 165–167 Inside directors, 294, 318 Installment loans, 251 Institute of Internal Auditors (IIA), 14 Institute of Management Accountants (IMA), 11, 14–15 Insurance, 113, 173 Intangible assets, 213–217, 228, 393, 716–719 Integrity, in ethics codes, 15, 25 Intel Corporation activity measures for, 417–418 comparative statements of, 44 consolidated statements of, 351 electronic delivery of proxy materials by, 53 equity incentive plan of, 394 fiscal year of, 35 governance issues on Web site of, 388 gross profit or gross margin ratio of, 348 note to financial statements of, 33 on 100 Best Corporate Citizens list, 16 par value of stock of, 41 trend analysis of, 84–88 Intel Corporation, annual report of, 6, 678–748 CEO letter in, 681 chairman letter in, 682 consolidated balance sheet in, 688 consolidated income statement in, 687 consolidated statement of cash flows in, 689 11/12/09 10:05:09 AM 755 Index Intel Corporation, annual report of—Cont consolidated statement of owners’ equity in, 690 controls and procedures in, 746 directors and compensation information in, 747 financial information by quarter in, 745 Form 10-K in, 683–685 independent auditors’ report in, 743–744 notes to consolidated financial statements accounting policies, 691–699 acquisitions, 714 available-for-sale investments, 705–707 borrowings, 719–721 comprehensive income, 731–732 contingencies, 736–739 credit risk concentrations, 713–714 derivative instruments, 711–713 divestitures, 715 earnings per share, 731 employee incentive plans, 726–730 equity and cost method investments, 707–711 fair value, 699–704 gains and losses equity investments, 711 goodwill, 716 intangible assets, 716–719 interest, 714 operating segments, 739–742 presentation, 691 retirement benefit plans, 721–726 stock repurchases, 730 taxes, 733–736 trading assets, 704 Interest accrual of, 154–155 annual percentage rate (APR) of, 250, 274 bank, 109 of bonds, 261 calculation methods for, 249–252, 275 deductibility of, 300, 426 definition of, 89 on discount amortization, 361 effective interest method for amortization of, 266 on income statement, 39 Intel Corporation annual report notes on, 714 on long-term debt, 264–266 rate of definition of, 89 in present value calculation, 222 in ROI calculation, 77 stated versus market, 262–264 times interest earned ratio, 428 Internal accounting, standards for, 11–12 Internal auditing, 8, 25 Internal control systems, 149–150, 177, 560 Internal rate of return (IRR) method accrued earnings versus cash flows in, 642 calculations in, 639–640 definition of, 647 Microsoft Excel for, 644–645 present value analysis in, 637 mar27068_index_749-762.indd 755 Internal Revenue Code on accelerated depreciation methods, 208 accounting and, 13 on asset useful life, 207 on inventory evaluation, 168 on Modified Accelerated Cost Recovery System (MACRS), 268 International accounting standards, 13–14 International Accounting Standards Board (IASB), 11, 13–14, 25, 671–672 International Anti-Bribery and Fair Competition Act of 1998, 16 International financial reporting standards (IFRS, International Accounting Standards Board), 13–14, 25, 672 Internet annual reports available on, 53 corporations connecting to customers on, 673 dot-com companies and, 475 e-commerce on, 113 Graphic Arts Information Network on, 595 Interpolation, 251, 275, 639–640, 647 Interstate commerce, in securities, 10 Intrinsic value method, of stock option accounting, 394 Intruder detection, 113 Inventories, 160–172 absorption versus direct costing and, 514 accounting alternatives for, 168–170 control standards for, 559 cost-flow assumptions of comparing, 162–165 in cost accounting, 500 cost of goods sold affected by, 346 definition of, 367 in explanatory notes to financial statements, 392 inflation and deflation effects on, 165–166 in perpetual inventory system, 170 quality changes effect on, 166–167 selecting, 167–168 working capital affected by, 415–416, 437 definition of, 37 errors in, 171–172 finished goods, 503 just-in-time (JIT), 418 lower of cost or market valuation of, 172 number of days’ sales in, 418–419 overview of, 160–162 purchases/production budget and, 548 raw materials, 500–501 raw materials purchase price variance and, 591–592 RFID (radio frequency identification) of, 673 sales forecasts and, 547 turnover measure for, 416 in variance accounting, 594–595 work in process, 503, 507 Inventory accounting system, 164, 168–170, 172, 177, 345–346 Inventory profits, 167, 177 Inventory shrinkage, 345, 367 Investment center analysis, 597–600, 604 Investments in capital projects, 641 cash flows from, 42, 359–361 growth strategy and, 364 Intel Corporation annual report notes on, 705–711 land as, 199 long-run analysis of, 635–636, 643–644 personal, 316–317 in working capital, 642 Investors, accounting and, 4, 25 Issued shares, of common stock, 297–298, 318 J JIT (just-in-time) inventory, 418 Job costing, 673 Job order costing system, 512–513, 521 Johnson & Johnson Co., Inc., 16 Joint variance, 587 Journal entry format, 111, 121, 126 Journals, bookkeeping, 108, 126 Junk bonds, 428 Just-in-time (JIT) inventory, 418 Just-in-time manufacturing, 513 K Kaplan, Robert S., 600 KPMG, L Labor, direct, 501 Land, as noncurrent asset, 199–202 “Language of business,” accounting as, Last-in, first-out cost-flow assumption; see LIFO (last-in, first-out) cost-flow assumption “Lean accounting,” 494 Leaseholds, 213–214, 227 Leases, 211–213 Least cost projects, 642 Ledgers, bookkeeping, 108, 126 Legal capital, of corporation, 296, 318 Leverage financial, 259–260 in financial statement analysis, 425–429 operating, 472–475 Leveraged buyouts, 428 Levitt, Arthur, 389 Liabilities, 246–291 current, 249–258 accounts payable as, 253 accrued, 257–258 deferred credits or unearned revenue as, 253–256 long-term debt current maturities as, 252–253 payroll taxes and withholdings as, 256–257 short-term debt as, 249–252 deferred tax, 173 definition of, 36–37, 56 noncurrent contingent, 271–272 deferred taxes as, 268–271 long-term debt as, 258–268 11/12/09 10:05:09 AM 756 Index Licenses, 213–215 LIFO (last-in, first-out) cost-flow assumption Accelerated Cost Recovery System (ACRS) versus, 208 cost of goods sold impact of, 165 definition of, 177 explanation of, 164–165 in explanatory notes to financial statements, 392 inflation and deflation effect on, 165–166 inventory quality effect on, 166–167 in perpetual inventory system, 170 prior period adjustments for, 302 selecting, 167–168 LIFO conformity rule, 168 LIFO liquidation, 167, 178 LIFO reserve, 415 Limited liability company (LLC), 34 Limited liability partnerships (LLP), 34 Limit tests, 150 Linearity assumption, in cost behavior pattern, 458 Liquidating value, of preferred stock, 299, 318 Liquidation, 48, 167, 294 Liquidity definition of, 89 in financial statement analysis, 415–416 inventory evaluation effect on, 165 measures of, 82–84 trend analysis of, 87 Litigation, pending, 271–272 Long-run analysis for decision making, 635–644 accounting rate of return for, 643 capital budgeting in, 637–640, 644 cash flow considerations in, 640–642 on cost of capital, 636–637 estimates in, 640 on investments, 635–636, 643–644 least cost projects in, 642 payback method for, 642–643 working capital investment in, 642 Long-term debt current maturities of, 252–253, 274 definition of, 37, 275 interest expense recognition for, 264–266 original issuance of bonds payable, 261–264 overview of, 258–261 retirements and conversions of, 266–267 terminology for, 267–268 Long-term investments, 217 Losses capital, 422 definition of, 38, 56, 344–346, 367 reasonable estimable, 271 from sale or abandonment of assets, 361 unrealized, 154, 201 Lower of cost or market inventory evaluation, 172, 178 M Machine usage, standards for, 559 Make or buy decision, 629–631 Management by exception, 583, 604 mar27068_index_749-762.indd 756 Management process, 4, 451, 495–498 Management Report on Internal Control over Financial Reporting, 388, 398, 404 Management’s Discussion and Analysis, in annual reports, 53, 390, 398–399, 404, 681–682 Managerial accounting, 450–493 cost classifications in, 454–457 cost-volume-profit analysis in, 451, 457–475 break-even point analysis in, 467–472 cost behavior patterns in, 457–459 expanded contribution margin model for, 463–466 modified income statement format for, 459–463 operating leverage in, 472–475 sales mix considerations for, 467–468 definition of, 477 financial accounting versus, 451–454 overview of, 7, 25 Manufacturing overhead; see also Cost accounting; Managerial accounting absorption versus direct costing and, 513 cost distortion in, 516–517 definition of, 501, 521 overapplied and underapplied, 507, 586 predetermined overhead application rate, 503, 506 in special pricing decision, 626 variable overhead efficiency variance for, 588 variable overhead spending variance for, 588 variance analysis of, 592–594 Margin; see also Contribution margin model definition of, 89 in DuPont Model, 79 gross, 39, 348–350 of safety, 470, 477 segment, 596 trend analysis of, 87 Marketable securities, short-term, 152–155, 178 Market rate of interest, 262–264 Market value, 154 Mark-to-market, 154, 669 Markup, 544 Master budget, 544, 563 Matching principle in accrued liabilities, 257 in bookkeeping, 49 definition of, 56, 367 depreciation as application of, 202 for revenue and cost of goods sold, 345 in ROI, ROE, and liquidity measures, 118 Material changes, in auditors’ reports, 402 Materiality concept, 51, 201 Mattel, Inc., 16 Maturity dates, on loans, 249, 275 Measurement, units of, 48 Merchandise inventory, 37, 56, 169, 178 Merchandising firms; see Cost accounting Mergers and acquisitions, 395, 428 Mesopotamian civilization, “Method of Venice” bookkeeping system, Microsoft Excel, 462, 644, 674 Minority interest, in subsidiaries, 270; see also Noncontrolling interests, in subsidiaries Misstatements, in financial reporting, 389–391 Mixed costs, 541, 563 Modified Accelerated Cost Recovery System (MACRS), 208, 228, 268 Money, time value of, 219–227 compounding frequency impact on, 226–227 future value calculation in, 219–221 present value calculation in, 221–226 Monopoly license, patent as, 214 Moody’s Investors’ Service, 417 Mortgage bonds, 267, 275 Mortgages, subprime, 154 Motion and time studies, 557 MotleyFool.com Web site, 316–317 “Moving” average cost-flow assumption, 170 Multinational corporations, 670 Multiple regression analysis, for estimating cost behavior pattern, 459 Multiple-step format, of income statement, 354, 367 Mutual funds, 316 N Nasdaq Exchange, 317 Natural resources, 217 Net assets, definition of, 36, 56 Net book value, 204, 209, 228 Net income attributable to noncontrolling interest, 357–358, 367 attributable to parent companies, 357–358, 367 definition of, 367 on income statement, 38, 56, 352–354 inventory evaluation effect on, 165 retained earnings and, 301 Net method, 253–255 Net pay, 256, 275 Net pension expense, 393, 404 Net present value (NPV) method, 637–639, 647 Net realizable value, for accounts receivable, 155, 178 Net sales, 38, 56, 367 Net worth, 36, 56 New York Bond Exchange, 261 New York Stock Exchange, 10, 317 Nonbusiness organization financial reporting, 21 “Noncontrollable” expenses, 584 Noncontrolling interests, in subsidiaries on consolidated financial statements, 270–271 definition of, 275 income statement and, 357–358 owner’s equity in, 311–313 Noncurrent assets, 198–245 buildings and equipment as, 202–210 acquisition costs of, 202 depreciation of, 202–207 11/12/09 10:05:09 AM Index Noncurrent assets—Cont disposal of depreciable, 209–210 maintenance and repair expenses of, 207–209 capital leases as, 211–213 intangible, 213–217, 228, 393 land as, 199–202 natural resources as, 217 time value of money in, 219–227 compounding frequency impact on, 226–227 future value calculation in, 219–221 present value calculation in, 221–226 Noncurrent liabilities contingent, 271–272 deferred taxes as, 268–271 long-term debt as interest expense recognition for, 264–266 original issuance of bonds payable, 261–264 overview of, 258–261 retirements and conversions of, 266–267 terminology for, 267–268 Nonoperating items, 351 No-par-value stock, 41, 296–297 Norton, David P., 600 Notes payable, 249, 275 Notes receivable, 159–160, 178 Not-for-profit organizations, 5, 8, 313 NPV (net present value) method, 637–640, 642 NSF (not sufficient funds) checks, 151, 178 Number of days’ sales in accounts receivable, 418, 437, 552 Number of days’ sales in inventory, 418, 437 O Objectivity principle, 15, 25, 49 Off-balance sheet financing, 212 Office of Federal Procurement Policy, 12 On account, sales, 111, 126 100 Best Corporate Citizens list, 16 Open database connectivity (ODBC) drivers, 674 Operating activities, cash flows from, 42, 359–360 Operating assets, turnover measure for, 416 Operating budget, 544, 563, 644 Operating cycle, 146, 178 Operating expenses, 350, 368 Operating income in continue or discontinue segments decision, 633 contribution margin model for, 464–465, 473–474 definition of, 367 on income statement, 350 inventory evaluation effect on, 165 in special pricing decision, 626, 628 Operating leases, 212, 228 Operating leverage, 472–475, 477 Operational budgeting, 635 Operations discontinued, 356 income from, 39, 350–351 income from continuing, 356 mar27068_index_749-762.indd 757 Opportunity costs, 52, 56, 623, 628, 631, 647 Organizational unit analysis balanced scorecard for, 600–602 investment center analysis in, 598–600 segment reporting in, 596–598 Original cost principle, 52 Other income and expenses, 351, 368 Outliers, in cost-volume relationship, 460 Outside directors, 294, 318 Outsourcing, 629, 647 Outstanding checks, 151, 178 Outstanding shares of common stock, 297–298 Overapplied overhead, 586 Overfunded pension plans, 270 Overhead absorption versus direct costing and, 513 cost distortion in, 516–517 definition of, 501, 521 overapplied and underapplied, 506–507, 586 overhead application rate for, 516, 521 predetermined overhead application rate for, 503, 506, 521 in special pricing decision, 626 variable overhead efficiency variance for, 588 variable overhead spending variance for, 588 variance analysis of, 592–594 Owners, absentee, Owners’ equity, 292–336 accounting equation balanced by, 44 accumulated other comprehensive income and loss as, 306–309 definition of, 36–37, 56 Intel Corporation example of, 690 noncontrolling interests in, 311–313 in not-for-profit and governmental entities, 313 overview of, 292–294 paid-in capital as, 294–301 additional, 301 common stock in, 294–298 preferred stock in, 298–301 in proprietorships and partnerships, 313 reporting changes in, 311 retained earnings as, 301–306 statement of changes in, 33, 40–41 treasury stock as, 309–311 P Pacioli, Luca, Paid-in capital, in owners’ equity, 293–301 additional, 301 common stock in, 293–298 definition of, 56 example of, 105–107 preferred stock in, 293, 298–301 on statement of changes in owners’ equity, 40 Parent companies, 48, 357–358; see also Noncontrolling interests, in subsidiaries Participating dividends, 299, 318 Participative budgeting, 542, 563 757 Partnerships, 34, 57, 292, 313, 318 Par value of stock capital in excess of, 301 definition of, 57, 318 as legal capital, 296 significance of, 40–41 stock splits and, 305 Past experience standards, 557, 563 Patents, 213–215, 228 Payback method, 637, 642–643, 647 Payment date, for dividends, 304, 318 Payroll taxes, 256–257 PCAOB; see Public Company Accounting Oversight Board (PCAOB) Peachtree Software, 672 Pension plans; see also Retirement benefits fair market value of, 393 obligations to, 269–270 in Statements of Financial Accounting Standards, 20 Percentage-of-completion method, 344 Performance guarantees, as accrued liabilities, 258 Performance reporting, 580, 583–586, 604, 620 Period costs, 501–502, 511 Periodic inventory accounting system, 164, 168–170, 172, 178, 346 Perpetual inventory accounting system, 164, 168–170, 178, 345 Personal investments, 316–317 Petty cash, 149, 178 Phantom profits, 167, 178 Physical inventory, 169, 178, 346 PIA Ratios (Printing Industries of America, Inc.), 595 Planning, 538–579 budgeting in, 541–556 analytical purposes for, 561–562 balance sheet for, 554–556 cash, 552–554 cost of goods sold, 550 income statement for, 551–552 operating expense, 550–551 overview of, 541–542 process of, 543–547 purchases/production, 547–550 time frame of, 542–543 cost classifications for, 540–541 in decision making, 620 definition of, 563 standard costs for, 556–561 costing products with, 558–559 developing, 557–558 other uses for, 559–561 Planning and control cycle of management, 452, 495–496, 538, 580, 620 Plant and equipment, turnover measure for, 416 Point-of-sale technology, 345 Postaudits of projects, 640, 647 Posting, in bookkeeping, 108, 126 Predetermined overhead application rate, 503, 506 Predictive business models, 560 Preemptive rights, from common stock, 297, 318 11/12/09 10:05:09 AM 758 Index Preferred dividend coverage ratio, 425, 437 Preferred stock, 298–301, 318, 353 Prepaid expenses, 173–174, 178 Prepaid insurance, 173, 178 Prepaid pension cost, 393, 404 Presentation, Intel Corporation annual report notes on, 691 Present value in bond price calculation, 261, 263 calculators for, 222 compounding frequency effect on, 226–227 cost of capital and, 637–639 definition of, 228 interest calculation with, 250–251 of lease payments, 211 tables for, 222–226 Present value ratio, 638, 647 Price/earnings ratio, 421, 437 Prices bond, 261, 263 setting, 349 special pricing decision for, 625–628 transfer, 598, 604 Price variance, 587 PricewaterhouseCoopers, Prime rate of interest, 249, 275 Principal, 77, 89, 261 Printing Industries of America, Inc (PIA), 595 Prior period adjustments, 302 Private equity firms, 428 Proceeds cash, 251, 275 of sale of depreciable assets, 211, 228 Process costing system, 512–513, 521 Product costs, 500, 502, 506, 521 Production standards, 453, 477 Productivity, American Productivity & Quality Center for, 595 Profitability asset base size and, 86 cash flows to show, 50 ethical conduct and, 16 financial statement analysis measures of, 420–425 gross profit to show, 348–350 on income statement, 38–39, 57 inventory reduction effect on, 146 phantom, 167 return on investment and, 78 Profitability index, 638, 647 Profit and loss statement, 38, 57; see also Income statements Profit center, 597–598, 604 Projected benefit obligations, 393 Property taxes, 582 Proprietorships, 34, 57, 292, 313, 318 Prospectus, 316, 396, 404 Protection of data, 113 Proxy materials, 53, 396 Public accounting, 7–8, 25; see also Certified Public Accountants (CPAs) Public Company Accounting Oversight Board (PCAOB); see also SarbanesOxley (SOX) Act of 2002 mar27068_index_749-762.indd 758 Public Company Accounting Oversight Board (PCAOB)—Cont auditing standards of, corporate governance and, 388 description of, 26 purpose of, 2, 11 Web site of, 14 Purchase accounting, 395, 404 Purchase returns and allowances, 346, 368 Purchases/production budget, 547–550 Q Qualified auditors’ report, 401 Quality changes, inventory evaluation and, 166–167 Quality control, standards for, 559 Quantity variance, 587–589, 604 QuickBooks, 672 Quick ratio, 83 R Radio frequency identification (RFID), 673 Rate of return; see also Return on equity (ROE); Return on investment (ROI) accounting, 637, 643 internal, 637, 639–640, 642 on investments, 76, 89 Rate variance, 587 Raw material inventory account, 169, 178, 500–501, 521 Raw materials, 500–501, 521 Raw materials price variance, 588, 604 Raw materials purchase price variance, 591–592, 604 Raw materials usage variance, 588, 604 Realization of revenue, 342–345, 368 Reasonableness tests, 150 Reasonably estimable losses, 271 Recession of 2008–2009, 494 Reclassifications, 116–117 Recognition of revenues, 49 Record date, for dividends, 304, 318 Redemption value, of preferred stock, 299, 318 Registered bonds, 267, 275 Regression analysis, 459, 544 Regular dividends, 425, 437 Regulations, investment decisions and, 644 Relevant costs, 623–635 in continue or discontinue segment decision, 631–634 definition of, 648 in make or buy decision, 629–631 in scarce resource allocation decision, 634–635 in sell or process further decision, 624–625 in special pricing decision, 625–628 in target costing question, 628–629 Relevant range assumption, 456, 477 Reliability concept, 202 Replacement costs, 52, 203 Report format, 110 Research and development expenses, 350 Residual income, 599–600, 604 Resources, scarce, 634–635 Responsibility center, 597, 604, 622 Responsibility reporting, 583, 604 Restructuring charges, 351 Retained earnings definition of, 57, 318 in owner’s equity, 293, 301–306 statement of changes in, 40–41 Retirement, of long-term debt, 266–267 Retirement benefits in Intel Corporation annual report, 721–726 reporting obligations of, 20, 270–271, 393 Return on equity (ROE) calculation of, 81–82 definition of, 90 inventory evaluation effect on, 165 leverage and, 259–260 as profitability measure, 420 treasury stock purchase effect on, 310 Return on investment (ROI) actual versus budgeted, 598–600 in balanced scorecard, 600–601 in capital budgeting, 635 definition of, 90 DuPont Model expansion on, 79–81 inventory evaluation effect on, 165 leverage and, 259–260 overview of, 76–79 as profitability measure, 420 value chain in, 496 Returns and allowances, sales, 343 Revenues definition of, 57, 368 on income statement, 38, 340–345 recognition of, 49, 161 unearned, 253–256 Reverse stock split, 305 Revolving line of credit, 249, 275 RFID (radio frequency identification), 673 Risk of cost distortion, 516 cost of capital and, 636 credit, 84, 713–714 data security and, 113 definition of, 90 flexible budget and, 585 liquidity ratios and, 87 margin of safety measure of, 470 in ROI calculation, 77 Robinson-Patman Act, 628 Rolling budget, 543, 563 S Safety, margin of, 470 Sales on account, 111, 126 of assets, 361 definition of, 368 forecast of, 544, 563 on income statement, 38 number of days in accounts receivable, 418, 552 revenue from, 343 Sales mix in break-even analysis, 469 cost-volume-profit analysis for, 467–468 definition of, 368, 478 in total gross profit, 348 11/12/09 10:05:09 AM Index Sales returns and allowances, 343, 368 Salvage value, 52, 211 Sarbanes-Oxley (SOX) Act of 2002 accounting retrospective analysis from, 668 corporate governance and, 388–389 documentation required by, 675 internal controls reporting in, 16 planning and budgeting and, 560 purpose of, 2, 11 SAS software, 518–519 Scarce resource allocation, 634–635 Scattergrams, of cost-volume relationship, 460 Schilit, Howard, 389 Scorekeeping, historical, 19 Securities, corporate, 316; see also Investments Securities Act of 1933, 10, 396 Securities and Exchange Act of 1934, 10, 395 Securities and Exchange Commission (SEC) accounting information and, corrupt financial reporting and, 669 description of, 26 disclosures required by, 386, 388 electronic delivery of proxy materials and, 53 Enron and WorldCom bankruptcies and, financial reporting misstatements and, 389 full disclosure requirements of, 51 history of, 10 IASB standards and, 14, 671 internal controls and, 16 reports to, 395–396 on revenue recognition, 345 Web site of, 14 Security, of data, 113 Segment margin, 596, 604 Segments operational units as, in Intel Corporation annual report, 739–742 organizational units as continue or discontinue decision on, 631–634 definition of, 604 disclosures about, 397–398 reporting for, 596–598 Selling, general, and administrative expenses, 39, 350 Sell or process decision, 624–625 Semilogarithmic graphs, for trend analysis, 88, 90 Semivariable costs, 456, 478 Serial bonds, 267, 275 Service, standards for, 559 Service charges, of banks, 151 Service organizations, cost accounting in, 515 Shareholders, accounting and, Shares; see Common stock; Preferred stock Shipping terms, 344, 368 Short-run analysis for decision making, 623–635 continue or discontinue segments in, 631–634 mar27068_index_749-762.indd 759 Short-run analysis for decision making—Cont make or buy decision in, 629–631 relevant costs in, 623–624 scarce resource allocation in, 634–635 sell or process decision in, 624–625 special pricing decision in, 625–628 target costing question in, 628–629 Short-term debt, 37, 249–252 Short-term marketable securities, 152–155, 178 Significant accounting policies, in explanatory notes to financial statements, 391–395, 404 Simple interest calculation, 250 Simple regression analysis, 459 Single-period budget, 542, 563 Single-step format, of income statement, 354, 368 Slack, budget, 551 Slate voting, of corporate directors, 296, 318 Social Investment Forum, 16 Social responsibility, 388 Source documents, of transactions, 111, 126 Special pricing decision, 625–628 Specific identification cost-flow assumption, 162, 178 Spending variance, 587 “Spread” (markup), 544 Standards; see also Financial Accounting Standards Board (FASB) auditing, 7–8 convergence in, 671–672 government accounting, 12–13 history of, 10–11 internal accounting, 11–12 international accounting, 13–14 production, 453 Standard costs, 556–561 costing products with, 558–559 definition of, 539, 563 developing, 557–558 in flexing the budget, 589 other uses for, 559–561 in variance accounting, 594 Standard cost variance analysis, 586–595 accounting for variances in, 594–595 of fixed overhead variances, 592–594 of variable cost variances, 586–592 Standard & Poor’s Corporation, 317, 417 Stated rate of interest, 262–264, 275 Stated value, of common stock, 296, 318 State income tax withholding, 256 Statement of cash flows; see Cash flows Statement of changes in capital stock, 40, 57; see also Owners’ equity Statement of changes in owners’ equity; see Owners’ equity Statement of changes in retained earnings; see Owners’ equity; Retained earnings Statement of cost of goods manufactured, 507, 521 Statement of earnings, 38, 57; see also Income statements Statement of Ethical Professional Practice (Institute of Management Accountants), 15 759 Statement of financial position, 35, 57; see also Balance sheet Statement of operations, 38, 57; see also Income statements Statements of Financial Accounting Concepts (Financial Accounting Standards Board), 10, 15, 17–20 Statements of Financial Accounting Standards (SFAS, Financial Accounting Standards Board), 10–11, 17, 20, 26 Stock; see also Common stock; Preferred stock cash flow impact of, 364 convertible bonds and, 267 description of, 34, 57 dividends as, 303–306, 310, 319 splits in, 303–306, 310, 319 treasury, 293, 297–298, 309–311 Stockholders, 34, 53, 57 Stock option plans, 394, 404 Stock purchase plans, 394 Straight interest calculation, 250 Straight-line amortization, 265 Straight-line depreciation, 204–206, 228, 268 Structured Query Language (SQL), 674 Suboptimization, 599, 604 Subprime mortgages, 154, 669 Subsidiaries in consolidated financial statements, 392 noncontrolling interest in, 270–271, 357–358 parent corporations of, 48, 57 Sum-of-the-years’ digits accelerated depreciation method, 205 Sunk costs, 623, 625, 648 System Life Cycle (SLC) methodology, 113 T T-accounts, 109, 124, 126 Take-home pay, 256 Tangible assets, 36; see also Assets; Current assets; Noncurrent assets Target costing, 625, 628–629, 648 Taxes accounting for, business organization and, 34 deferred, 174 FICA, 256 income absorption costing for, 513–514 on capital project cash flows, 641 depreciation impact on, 208 in expensing versus capitalizing decision, 201 income before, 352 inflation effect on, 167 withholding of, 256 income disclosure of, 392–393 on income statement, 39 in Intel Corporation annual report notes, 733–736 interest expense deductible from, 300, 426 payroll, 256–257 property, 582 11/12/09 10:05:09 AM 760 Index Tax Reform Act of 1986, 208 Technology, accounting and, 672–675 Temporary difference items, 268 10-K filings, 388, 396, 398 Term bonds, 267, 275 Theft, by customers, 149 Times interest earned ratio, 428, 437 Time value of money, 219–227 accounting rate of return and, 643 compounding frequency impact on, 226–227 future value calculation in, 219–221 present value calculation in, 221–226 Top-down budgeting, 542, 563 Total costs, 455–457, 540–541, 581–582; see also Cost-volume-profit (CVP) analysis Total operating assets, 416 Trademarks appraising value of, 51–52 definition of, 228 as intangible assets, 213–215 Trading assets, 704 Trading securities category, 154 Transaction analysis methodology, 119–124, 126 Transactions accounting principles related to, 48–49 authorization of, 150 in bookkeeping, 105, 107–108 in computerized accounting systems, 113 credit, 109 definition of, 57, 126 electronic, 673 for financial statements, 33–34 product and period costs as, 502 revenue recognition, 161 source documents of, 111 Transfer price, 598, 604 Transparency, regulatory increase in, 2; see also Sarbanes-Oxley (SOX) Act of 2002 Treasury stock on balance sheet, 293 cash flow impact of, 364 definition of, 319 outstanding shares versus, 297–298 recording, 309–311 Trend analysis, 82, 84–88, 90 Trustee of bonds, 267, 275 mar27068_index_749-762.indd 760 Turnover, 416 definition of, 90 in DuPont Model, 79–80 trend analysis of, 86–87 U Uncollectible accounts, 155–158, 178 Underapplied overhead, 506, 521, 586 Underfunded pension plans, 270 Unearned revenue, 253–256, 275 Unfavorable variances, 583, 587–588, 604 Uniform Standards of Profession Appraisal Practice (USPAP), 51 U.S Department of the Interior, 518 U.S Fish and Wildlife Service, activitybased costing for, 518–519 United Way, Units of measurement, dollars as, 48 Units-of-production depreciation, 206, 228 Unqualified auditors’ report, 12, 400 Unrealized gain or loss, 154 Usage variance, 587 Useful life of assets, 207 V Valuation adjustments to, 156, 178 inventory, 165–167, 392 lower of cost or market, 172 of marketable securities, 152–154 “mark-to-market,” 154 Valuation accounts, 157, 178 Value, stated, of common stock, 296 Value chain, 495–496, 521 Value Line Publishing, Inc., 417 Variable costing, 513, 521 Variable costs activity level and, 581 in break-even analysis, 472–473 contribution margin model and, 549 in cost formula, 460, 462 in cost to volume of activity relationship, 455 definition of, 478, 563 direct costing effects on, 514 planning for, 540 in special pricing decision, 626, 628 variance analysis of, 586–592 Variable overhead efficiency variance, 588, 604 Variable overhead spending variance, 588, 604 Variances accounting for, 594–595 definition of, 604 drivers of, 560 favorable and unfavorable, 583 fixed overhead, 592–594 variable cost, 586–592 volume, 592–593, 604 Verification, in bank reconciliation, 151 Virus protection, 113 Volume of activity, 455–457, 540–541, 581–582; see also Cost-volumeprofit (CVP) analysis Volume variance, 592–593, 604 Voting for corporate directors, 53, 296 W Wages, accrued, 116 Wall Street Journal, The, 88, 423 Wal-Mart Stores, Inc., 160 Warranties, as accrued liabilities, 258, 270–272 Web-based stockholder voting, 53 Web sites, financial disclosures on, 674 Weighted-average cost-flow assumption, 162–163, 170, 178 Withholdings, 256–257 Working capital definition of, 90 inventory cost-flow assumptions and, 415–416, 437 investment in, 642 as liquidity measure, 82–84 loan on, 249, 275 trend analysis of, 87 Work in process inventory, 169, 503, 507, 521 WorldCom, Inc., 2, 11, 389 “Worry point” guide, cost of capital as, 636 Write-off of accounts receivable, 157 X XBRL (Extensible Business Reporting Language), 674 Z Zero-based budgeting, 542, 563 11/12/09 10:05:09 AM ... image for the ninth edition of Accounting: What the Numbers Mean because the authors show students how to put the pieces together and understand their relationship to one another to see the larger... bank questions in Accounting: What the Numbers Mean 9e with the general knowledge and skill guidelines found in the AACSB standards The statements contained in Accounting: What the Numbers Mean 9e... picture Conceptual Accounting: What the Numbers Mean focuses on helping students understand the meaning of the numbers in financial statements, their relationship to each other, and how they are used